The S&P 500, Explained

People often say "the stock market is up," or "the market is down." But the stock market is an amorphous thing, encompassing thousands of equities and dozens of stock exchanges. What they often mean is a particular stock market index, or group of publicly traded companies, is up or down.

And if they're in the U.S., odds are that index is the S&P 500.

Named for the number of companies on its list, the S&P 500 is "a broad-based index that includes the cross-section of economic sectors like information technology, healthcare and consumer discretionary, as well as major companies in the financial, energy, industrial, and consumer durable sectors," says Solomon Tadesse, who heads North American equity quantitative research at Société Générale.

"As such, the S&P 500 is a good proxy of the U.S. equity market and, by implication, the economy and its near-term trends."

Understanding the S&P 500

Understanding the S&P 500 can be important for investors, whether or not you're investing in an S&P 500 index fund or not. Here's everything you need to know about this influential index.

What is the S&P 500?

Developed by Standard & Poor's (now S&P Global), the S&P 500 launched in 1957. But its status as a proxy for the U.S. equity market was cemented in 1968, when the S&P 500 became one of the economic indicators used by The Conference Board, a leading business membership and research organization, to forecast economic trends.

It's what's known as a weighted index, meaning companies with a higher market capitalization (the total value of all their stock shares) account for a higher percentage of the index's overall value. That means the overall index correlates more closely to the broader market, i.e., the larger companies have an outsized effect.

The index's relative level — or the collective worth of the stock shares within it — is expressed in points. In March 2025, it stood at around 5,700. So if the S&P 500 experienced a 10% climb from this point, it would mean an overall index gain of 570 points.

How the S&P 500 works

Selection criteria for companies

To be in the S&P 500, companies need to meet some specific requirements:

• Be based in the U.S. (though it can have overseas operations)
• Be a corporation and offer common shares of stock
• Have a market capitalization of at least $20.5 billion
• Trade on a major U.S. exchange (e.g., NYSE, Nasdaq Global Market)
• Have shares that are highly liquid
• Have positive earnings in the most recent quarter, and have positive earnings when adding up the last four quarters

Market capitalization and weighting

As a weighted index, larger companies account for higher proportions of the index than some relatively smaller companies — though all are still large companies in the grand scheme of things. Still, by weighting the index, a handful of companies can drive returns, for better or worse.

In other words, market cap weighting can lead to substantial concentration, such as how in early 2025, just 10 stocks accounted for nearly 35% of the benchmark index's value.

Rebalancing and adjustments

The S&P 500 undergoes rebalancing once a quarter to reflect market cap changes, such as increasing the share of growing companies and decreasing the weight of shrinking ones. This rebalancing process can also result in adding new companies and discarding old ones. Securities that have entered the public markets as a result of an initial public offering (IPO), for example, can potentially join the S&P 500, while some shrinking companies might fall out of the index. However, the S&P 500 can add or remove companies at any time, not just during rebalances.

Other reasons for changes might include if a company changed its domicile so that it is based in the U.S., which could make it eligible to join this benchmark index. Or, activity like mergers and acquisitions might drive additions or subtractions to the index.

Importance of the S&P 500

Benchmark for U.S. stock market performance

The S&P 500 is frequently used as a proxy for the value of the entire stock market, since the stocks it contains account for roughly 80% of the total value of U.S. stocks that are publicly available for trading. Many investors use it as a benchmark when evaluating their performance in other assets or funds. For example, an investor in an active mutual fund might weigh that fund's performance vs. the S&P 500 performance, and if the mutual fund isn't keeping up, that might prompt them to make a change.

Economic indicator

Many think of the S&P 500 as not only a good way of measuring the strength of the stock market, but also the health of the economy overall. Market observers might interpret notable gains in this benchmark index as being a bullish sign for the economy, while notable declines might portend weakness in business conditions.

It is worth noting that the value of the S&P 500 fluctuates throughout the trading day and ideally prices in future growth outlooks, so it is considered a leading indicator. Meanwhile more traditional economic indicators, for example GDP and the unemployment rate, are lagging indicators, meaning they provide information on things that have already happened.

U.S. GDP, for example, is issued for every quarter, although the Bureau of Economic Analysis, which calculates this data, provides three different estimates for every quarter.

That said, the S&P 500 does not perfectly represent economic conditions. Some large companies might be doing very well amidst more difficult circumstances like high unemployment, for example.

Investor sentiment

The S&P 500 can serve as a proxy for the sentiment of investors. CNN Business has something called the Fear & Greed Index, which uses several different measures, including one based on the S&P 500, to determine how fearful or greedy the markets are.

More specifically, the Fear & Greed Index examines the S&P 500's value and compares it to its 125-day moving average (MA). If the index's recent values have been consistently higher than the aforementioned MA, the situation indicates bullish momentum.

Alternatively, if the S&P 500's recent values are lower than the 125-day MA, it points to the nervousness of investors.

How to invest in the S&P 500

S&P 500 investment strategies vary by investor, with some just investing in one S&P 500 fund as a proxy for the stock market, while others further diversify with different types of funds. There's no universal right way to invest in the S&P 500, but instead it depends on your goals, risk tolerance, access, etc.

For example, your S&P 500 investment strategies in your retirement account might differ from how you'd go about investing in the fund in your personal brokerage account.

In a retirement account like a 401(k), you might invest in something like a target-date fund, which automatically invests part of its assets in an S&P 500 fund but also a variety of other funds that are appropriate for your risk tolerance, based on age. Meanwhile, in your personal brokerage account, you might buy an S&P 500 fund while also putting some money into individual stocks, if you're willing to take on more risk than you might within your retirement account.

Because there's no inherently correct S&P 500 investment strategy, consider speaking with a financial advisor or using technology like a robo-advisor to design a portfolio for you that perhaps includes some exposure to the S&P 500 while also perhaps some other indexes.

That being said, if you do want to invest in the S&P 500, some ways to do so include buying:

Index funds

You can't invest directly in the S&P 500 — it'd be like trying to buy a list of groceries, instead of the groceries themselves. Instead, you invest in the S&P 500 through index funds. They're like baskets that contain all the groceries on the S&P list.

An index fund is a type of financial vehicle designed to mimic a particular market index. It pools investors' money to purchase a portfolio of stocks or other securities. In the case of S&P 500 index funds, the stocks are those of the companies listed in the S&P 500.

Most index funds are "passively managed," meaning the investment professionals overseeing them don't trade the holdings very much. Their goal is to duplicate the index's make-up and performance, instead of trying to beat it. Index funds appeal to long-term-oriented, buy-and-hold investors, who try to let their assets grow on auto-pilot.

Some index funds are mutual funds, while others are exchange-traded funds (ETFs). The ownership structure is a little different, but the main difference is that you can buy and sell ETFs throughout the trading day, and the price updates in real-time, rather than after the close of each trading day. But mutual funds can offer some benefits, such as with it sometimes being easier to invest in fractional shares of mutual funds.

One factor you should keep in mind is that while either a mutual fund or ETF may be designed to track an index like the S&P 500, they don't always perfectly do so, and failure to accurately mimic or follow an index is known as tracking error.

Basically, all the leading financial services companies offer S&P 500 index funds such as:

• Charles Schwab
• Fidelity Investments
• Vanguard

You can buy these funds through online brokerages such as:

• Robinhood
• Stash

And with some of the best robo-advisors:

• Wealthfront
• Betterment

Specifically, some of the leading S&P 500 index funds include:

• Vanguard 500 Index Fund Admiral Shares
• State Street Global Advisors' SPDR S&P 500 ETF Trust
• Fidelity 500 Index Fund
• iShares Core S&P 500 ETF

Individual stocks

Another way you can invest in the S&P 500 is by purchasing individual stocks. As stated earlier, seven stocks account for over one-third of the value of this index, so you can gain exposure to a large section of the S&P 500 with a relatively low number of transactions.

However, if you want to gain exposure to this index through acquiring individual stocks, you should keep transaction-related fees like commissions in mind. The fees associated with buying these individual shares can quickly add up, eating into your returns. Plus, there's a lot of complexity involved with buying and tracking multiple stocks, especially if you want to own all 500 companies in the index. So, in many cases, buying an index fund is more practical.

Benefits of investing in the S&P 500

Diversification

Investing in the S&P 500 can quickly grant you exposure to a diversified group of stocks, as this particular index represents roughly 80% of the U.S. stock market.

Historical performance

It is helpful to be familiar with the historical S&P 500 performance.

Over its lifetime, the index has returned an average of roughly 10% per year. However, not all years represented increases, as some of them came with sharp declines. In 2002, for example, the index dropped over 23%, and in 2008, it fell close to 40%. Still, the long-term trend has been strong.

Low expense ratios

There are myriad funds you can use to invest in the S&P 500, and many of them have low fees. Index funds, in particular, are known for having very low expense ratios, which is the annual percentage fee that the financial institution offering the fund charges every year to manage it.

Risks of investing in the S&P 500

Market risk

The value of the S&P 500 is susceptible to market risk, meaning that it can fluctuate if the overall conditions of the broader market changes. Because the S&P 500 correlates with a large percentage of the overall stock market, a stock market decline would typically also correspond with a loss in the S&P 500's value. Even if the market sell-off originates outside of S&P 500 companies, there's still a risk that S&P 500 investors might also sell off to account for these other market occurrences.

Economic downturns

Should economic conditions trend lower, that will frequently cause stocks in general to lose value. Stock prices are based around expectations of future profitability, and business earnings decline during recessions. Investors may also become nervous and engage in panic selling should the economy fall into recession.

On the plus side, U.S. expansions last longer, on average, than recessions. The US entered a period of GDP growth in 1991, for example, that lasted 120 months. Starting in 2009, it entered its longest expansion in history, which went on for 128 months.

In contrast, the recessions that took place before the aforementioned expansions lasted 8 and 16 months, respectively.

Overexposure to large companies

Some market observers have voiced concerns that the value of the S&P 500 is concentrated in the shares of too few companies. That can mean you're risking more on a handful of S&P 500 companies than you may have realized, rather than getting broad market exposure.

That said, high concentration isn't automatically bad. For example, a Goldman Sachs report noted several periods of high concentration over the last 100 years and found that in the 12 months following these crucial points, these stocks were more likely to rally than decline.

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